Regional Snapshot of Government Bond Markets, South Asia & Asia Pacific

1. Regional Snapshot ofGovernment Bond Markets,South Asia & Asia Pacific Colombo, Sri Lanka, June 8-11, 2004 Demet Cabbar, Thordur Jonasson The World Bank

2. Objective • To provide snapshot of government securities markets in the region • Follows Handbook framework • Based on research and some survey responses from some Treasuries, Public Debt Offices and Central Banks of seven countries in East Asia Pacific and one country in South Asia • Preliminary study for an upcoming report • Will be completed with your feedback • Not a conclusive assessment • A tool to start healthy discussion

3. Economic Outlook

4. Economic Growth by Region EAP and South Asia have the highest growth prospects Average Annual % Growth EAP South Asia Source: The World Bank, Global Economic Prospects 2004.

5. Key Econ. Indicators: South Asia & EAP GDP Growth Excluding India, EAP values excluding China

6. Current state of the market

7. Main characteristics • Disparity in level of development among markets • Domestic government debt is greater than external government debt. • Domestic debt is mostly local currency denominated • Fixed rate bonds dominate most markets, and most are mid to long term maturities • Non marketable securities are still sizeable • Shift towards longer term instruments

8. Size of the market – South Asia Total Government Debt (US bn) Source: SBP Annual Report 2002-2003, MOF Statistics India 2003, Nepal Rastra Bank 2001-2002, Annual Report Bank of Bangladesh 2003, CBSL Estimates August 2002

9. Size of the Economy - GDP Wide disparity in the size of the economies US bn Source: WDI Database, 2002

10. Size of the market Government Debt as a % of GDP – South Asia Source: SBP Annual Report 2002-2003, MOF Statistics India 2003, Nepal Rastra Bank 2001-2002, Annual Report Bank of Bangladesh, CBSL Estimates August 2002

11. Size of the market Total Government Debt (US bn) - South Asia and EAP Source: survey responses for EAP and SBP Annual Report 2002-2003, MOF Statistics India 2003, Nepal Rastra Bank 2001-2002, Annual Report Bank of Bangladesh, CBSL Estimates August 2002 Note: Indonesia and Thailand uses June 2002 data

12. Size of the market Government Debt as a % of GDP – South Asia & EAP Source: survey responses for EAP and SBP Annual Report 2002-2003, MOF Statistics India 2003, Nepal Rastra Bank 2001-2002, Annual Report Bank of Bangladesh, CBSL Estimates August 2002 Note: Indonesia and Thailand uses June 2002 data

13. GS Markets as a % of GDP by Region. Ext. Debt is lowest in East Asia Pacific Size of the market

14. Domestic GS composition Marketable vs. Non-marketable Securities *excludes SU series bonds to the Central Bank Note: 1999 data for India and Pakistan

15. Domestic debt composition *includes non marketable hedge bonds

16. Fixed rate securities dominant in EAP and MENA Domestic debt composition Source: WB Govt. Bond Market Surveys 2001-2003

17. Domestic debt by tenor *Bonds issued for bank recapitalization

18. Domestic debt by tenor Short Term vs. Mid-to-Long Term in South Asia Source: State Bank of Pakistan Annual Report 2002 – 2003, Bangladesh WB survey, Sri Lanka WB report, ADB Report 1999

19. Domestic debt by tenor Longer term securities most common in EAP Note: Data is based on simple averages of countries included in the World Bank/IMF Survey, during 2001-2003

20. Institutional framework and primary markets

21. Institutional framework • Most countries formalize debt management objectives in the legal framework • All countries have a legal framework for borrowing authority, limits on borrowing • Central Bank is still a primary issuer in markets • Debt Management is generally the responsibility of Ministry of Finance. • Supervision is generally the responsibility of the Central Banks

22. Decisions made by Ministry of Finance – Asia Pacific Note: Central Bank in the case of Singapore

23. Legal limits on borrowing

24. Limits on borrowing

25. Fiscal & monetary policy coordination • Separate coordination committees in Malaysia Sri Lanka & Philippines, alternative coordination arrangements in other markets • Central Bank securities issued in 5 countries requiring coordination with government issues

26. Market supervision – South Asia and Asia Pacific

27. Primary markets • Primary dealer (PD) arrangements available in most markets • Auctions are main method of primary issuance, but alternate methods are also used • Central Banks are generally auction agents • Most countries publish auction schedule, and have limits on participation in auctions • Re-openings are common

28. Primary dealers

29. Auctions

30. Auctions are mostly settled in 1 or 2 days

31. Secondary market and infrastructure

32. Secondary market • Banks and institutional investors are dominant holders (liquidity management & lack of lending opportunities) • High statutory liquidity ratios and reserve requirements • Disparity in depth of the market (liquidity) • Active repo markets in some countries • Few restrictions on forwards, short selling and borrowing/lending securities • Few countries impose transaction tax

33. Investor base Investor Base of GS – South Asia Banks and Institutional investors have largest share of GS in India, Pakistan and Sri Lanka Resource: SBP Annual Report 2003 for Pakistan and WB Survey Note: Non-banks include EPF(31.7%), NSB (13.2%), and Savings Institutions in Sri Lanka and National Savings Scheme in Pakistan)

34. Investor base *Malaysia: includes pension, insurance & Employee Provident Fund **Commercial banks and Special Financial Institutions combined

35. Investor base Banks are dominant holders of GS Note: Data is based on simple averages of countries included in the World Bank/IMF Survey, during 2001 -2003

36. Secondary market liquidity Note: Turnover is calculated as Annual trading volume/Year end marketable securities outstanding. *Annualized data Jan-June 2002, Thailand Jan-Sep2002 ** No breakdown given *’includes National Housing bonds.

37. Secondary market liquidityAverage trading of GS highest in East Asia Note: Turnover is calculated as Annual trading volume (outright and repos) /Year end marketable securities outstanding. Data is based on simple averages of countries included in the World Bank/IMF Survey, during 2001 and 2003 (which have provided data varying from end 2001-2003)

38. Trading possibilities Source: IOSCO Debt Market Survey 2001 and WB debt market surveys

39. Tax regime * ADB Bond market report 1999

40. Infrastructure • OTC trading dominates, exchange trading is also developing. • Paper securities is phasing out • Settlement is mostly RTGS with delivery vs payment, but gross settlement w/o DVP still used in China and Indonesia • Independent depositories used in China, and Korea, where Central Bank holds the Central Depository role in others.

41. Settlement arrangements Source: IOSCO Debt Market Survey 2001, WB Bond Market Survey

42. Depository arrangements Note: Subdepository or other depository institutions

43. Conclusions/Achievements • Proactive stance in developing domestic debt markets • Enhanced macroeconomic stability in the region supports development of domestic debt markets • Improvements in the institutional framework facilitates development • Fixed rate securities & development of mid to long term market is positive for development of a yield curve • Key aspects of required infrastructure are available • Dematerialization of securities is wide-spread

44. Challenges • Stimulating a more diverse investor base • I.e Access of individual and foreign investors • Reduce reliance on non marketable debt • Enhancing efficiency of the settlement systems – Integrating Sytems • Fostering more active secondary markets • Organizing the trading market • Reducing fragmentation in some markets • Developing a benchmark yield curve • Enhancing public debt and cash management

45. Thank you